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Free market, free Willy

I am an environmentalist, which is to say that I enjoy and value nature and believe it is important to identify and address serious pollution problems. But I am not a typical environmentalist. The assumptions I make about both the causes of environmental degradation and its solutions are fundamentally different from those of what I will call the standard environmentalist model.

My beliefs are best characterized as free-market environmentalism. Simply stated, a free-market environmentalist believes that the incentives created by markets will usually do a better job of protecting the environment than government intervention. Standard environmentalists, on the other hand, believe that regulation is a necessary remedy for markets’ failure to provide enough environmental amenity. They consider free-market environmentalism an oxymoron. Let me show you why it isn’t – and why it is a powerful philosophy for improving our environment.

A critical difference between standard environmentalists and free-market environmentalists is their view of economic growth. The standard view is that growth is destructive because producing more pollutes more. In a static world, that is true. But the world is dynamic and there are two strong forces that counteract the “produce-more-pollute-more” effect.

First, the increased income that is generated when more goods and services are produced drives a demand for more environmental quality. Once per-capita incomes cover basic food and shelter requirements, cleaner air and water become priorities. That explains why some of the richest countries in the world, such as Canada and the United States, are also the cleanest. Second, economic growth stimulates innovation. Since newer technology tends to be both more efficient and cleaner, it improves environmental quality.

Strong evidence supports the idea that those two factors – the impact of income and technological progress – actually dominate the “produce-more-pollute-more” effect. According to the World Bank, pollution rates from particulate matter and sulphur dioxide begin to fall at per-capita incomes of US$3,280 and US$3,670 respectively. Access to safe drinking water and the availability of sanitation improve almost immediately as incomes rise. Another study by economists Gene Grossman and Alan Krueger, finds that most indicators of pollution start to fall before a country reaches a per capita income of US$8,000.

That explains why North Americans enjoy the luxury of worrying about infinitesimal levels of pesticide residues on our vegetables while in poor countries many people do not have access to safe drinking water and have no option but to use extremely polluting charcoal or cow dung for cooking and heating fuel.

To a free-market environmentalist, economic growth is not the enemy of environmental progress but rather the surest way to solve some of the world’s worst remaining pollution problems.

A standard environmentalist will disagree with this line of logic. Instead of focusing on the big picture – higher-income countries have less pollution – they call our attention to individual examples of the trade-off between development and environmental quality: The fact that logging, mining, housing developments and new shopping malls all have impacts on their local environments. Of course they are correct; any human development will have some impact on the environment. But given that humans populate the Earth, the choice is not between a pristine environment if economic growth is controlled and a polluted one if it is not. Capitalist economies, which have higher levels of economic growth, will not deliver a pristine environmental utopia with no pollution, but they are capable of delivering more environmental amenity than socialist economies. That is the foundation of free-market environmentalism.

As protests against free trade in Seattle in 1999 and in Quebec City in 2001 demonstrate, most standard environmentalists view free trade as part of the problem. In part, that is because free trade increases specialization, which creates economic growth. But as discussed above, this environmental criticism of trade is unwarranted. Growth leads to an increase in income, which in turn creates a demand for more environmental quality. Free trade has another important environmental benefit, however. Trade forces industries to be more competitive than they otherwise might be, which accelerates the adoption of newer, cleaner technology.

Another reason that some standard environmentalists oppose free trade is that they fear trade will cause a degradation of environmental standards as countries are prevented from pursuing their own higher levels of protection. But trade agreements do not prevent countries from protecting their environments.

Article 20 of the charter of the World Trade Organization clearly states that member countries may impose trade restrictions that are “necessary to protect human, animal, or plant life or health.” The only qualification is that such restrictions must be based on sound scientific evidence and must apply to both importers and domestic producers. That qualification is necessary to prevent disguised protectionism.

Finally, standard environmentalists oppose trade because they believe that it allows rich countries to exploit poor ones. In their view, a fixed amount of wealth exists to be divided between countries and if one country gains, another one loses.

But that is not how trade works. If it were, why would any developing country agree to trade? Countries that are open to trade, whether rich or poor, tend to grow faster than those that are not because exchanging goods and services allows for specialization. That, in turn, increases productivity and allows citizens to consume a wider variety and greater amount of goods and services than they could without trade. That positive effect of trade holds for all countries, rich and poor.

Free-market environmentalists believe that well-defined property rights are a powerful tool to protect the environment for two reasons. Ownership creates stewardship incentives and gives individuals the power to fight polluters.

As free-market environmentalist Jonathon Adler explains, “Even someone indifferent or hostile to environmental protection has an incentive to take environmental concerns into account, because despoiling the resource may reduce its value in the eyes of potential buyers.” Private property makes it possible for environmental groups such as the Nature Conservancy and Ducks Unlimited to protect habitat by purchasing land and establishing wildlife preserves.

Perhaps the easiest way to understand the power of property rights is to look at what happens when they are absent. Many fisheries, for example, are treated like common property – fish do not belong to anyone until they are caught. That leads to over-fishing. Although each fisher would like the fishery to be healthy in the future, the short-term incentives each faces are at odds with this desire. They know that fish they do not catch today will be caught by someone else.

Not surprisingly, that has led to the collapse of many fisheries around the world.

The second important feature of ownership is that under common law, it gives people the ability to fight polluters through trespass, nuisance and riparian rights around waterways.

Where governments have not usurped those rights with statutes and regulations, they are powerful tools for protecting the environment. In just one of many examples, the Pride of Derby, an English fishing club, successfully sued upstream polluters for trespassing against private property.

In contrast to that approach, standard environmentalists put their faith in government regulations and are seldom seen arguing that stronger property rights would constitute an environmental solution.

Their approach is widely criticized by free-market environmentalists. As Elizabeth Brubaker explains in her book Property Rights in the Defence of Nature, “Many environmental groups prefer regulatory solutions to environmental problems. But regulations are made by remote governments who, driven by the need to create jobs or some undefined ‘public good,’ are often the least responsible stewards of natural resources. Governments of all political stripes have given us thousands of reasons not to trust them to protect the environment: they’ve licensed – and bankrolled – polluters, turned forests into wastelands, emptied oceans of fish and dammed rivers that were once magnificent.”

That is not to say that free-market environmentalists do not believe in any regulations. While critics of the free-market environmental approach often accuse them of such an extreme view, free-market environmentalists recognize that governments have a critical role to play in the definition and enforcement of property rights. Regulations may also have a role to play when property rights are as yet difficult or impossible to assign – for example, in the case of air quality.

But beyond the definition and enforcement of property rights, free-market environmentalists view regulations with much suspicion. That is in part because well-intentioned regulations often have unintended effects that undermine the original intent of the regulation. For example, the laws passed in the United States designed to protect species inadvertently created the perverse incentive for landowners to view them as a liability.
In extreme circumstances, that led landowners who could have otherwise happily co-existed or even protected endangered species to take measures to eliminate endangered species from their property in order to protect their property values.

The debate about how best to protect the environment is only just beginning. As incomes around the world continue to increase, so too will the demand for environmental protection.

To date, standard environmental thinking has dominated the debate. But free-market environmentalism is gaining ground. People are beginning to understand that while markets are not perfect, neither are governments. They are beginning to recognize that markets can provide incentives for stewardship.

As in other areas, the competition between these two ideologies is not to be feared. It can help generate thoughtful debate about how best to protect the environment.

Memos to the Prime Minister: What Canada Could Be in the 21st Century is a collection of essays edited by Harvey Schacter and published by John Wiley and Sons Canada Ltd.